February 10, 2014

4 Reasons U.S. Doomsayers Are Wrong: Milken Expert

Milken Institute senior fellow Joel Kurtzman, in new book, argues a period of U.S. economic dominance is soon to be unleashed

Anxiety about U.S. decline is not merely the province of America’s chattering class; surveys of the population reflect a widespread pessimism. A recent Associated Press survey shows that a majority of respondents expect an erosion in the American way of life over the coming decades, while an extensive separate AP survey shows that less than a quarter of Americans expect improving conditions.

Count Joel Kurtzman among that diminutive remnant of optimists.

A senior fellow at the Milken Institute, an economic think tank based in Santa Monica, Calif., and a board member of the SEI Center for Advanced Management at the Wharton School, Kurtzman blames today’s “raucous and wrongheaded political debate” for misjudging the enormous vitality America is about to unleash.

His new book, out later this week, is Unleashing the Second American Century: Four Forces for Economic Dominance, and its data-filled contents might induce declinists to reconsider their narrative of doom.

“We really underestimate the creativity and innovative capacity of the country — it’s not genetic, it’s cultural,” Kurtzman says of the first of those four forces in a phone interview with ThinkAdvisor.

“The leading companies we have in the U.S. are not duplicated anywhere in the world … There are no other Apples, no other Facebooks.

“The corridor around MIT in Boston,” he continues, “is the world headquarters for biotech research; we have nine other [research corridors] equally as powerful as that.”

Besides our culture of innovation, Kurtzman says U.S. energy independence may be an underappreciated force for positive change in U.S. economic life.

“The energy revoltion is underestimated in terms of its power for the country,” Kurtzman says. “Look at the U.S. in terms of its tremendous capacity for manufacturing and put a Saudi Arabia on top of it and you get to see the picture,” he says.

“We’re a larger energy producer than Saudi Arabia and a larger energy producer than Russia,” Kurtzman says, adding that Americas need to take stock of that fact in comparison to the very recent past.

“Just four years ago we were declining in terms of our production, but it’s now increasing," he says. "We’re essentially re-plumbing the United States.”

That burst of new energy, unleashed primarily by fracking of America’s vast oil and gas shale reserves, adds strength to the third powerful force for U.S. economic dominance, which is the re-shoring of U.S. manufacturing.

Kurtzman illustrates the trend by citing the example of German car manufacturer BMW, which now makes its entire fleet of SUVs — for sales worldwide — in the U.S., which boasts abundant and cheap energy, as well as superior logistics compared to other manufacturing centers like China; it is cheaper and easier to transport its cars from the factory to its ultimate destination.

What’s more, labor costs in China and the costs of labor and software in India have gone up, while labor costs have remained flat in the U.S. while productivity is very high.

“If you make things in China, you have to move things to the U.S. with expensive oil. And shipping costs are not trivial — they’re a very important part of the mix,” Kurtzman says.

The ability to rapidly move things to market confers a big advantage on U.S. manufacturing. If the customer is in New York, and the factory in Illinois, a rapidly modified product can get to where it’s needed in days, if not hours.

From Asia, that would be weeks, says Kurtzman, who also stresses that today’s “third wave” of manufacturing (from assembly lines to the first robots to today’s “highly intelligent autonomous robots”) is well suited to U.S. factory workers. The latest models — like Baxter, whose developers tout it as having "common sense" — need not be programmed.

“You just move [Baxter's] arms to where you want them and it learns and will repeat what you show it. It doesn’t take skill to program that robot,” he says, adding that Apple is now bringing back a computer factory from China to Texas that will be highly automated and deploy robots like Baxter.

But it is not just the use of technology but deployment of financial capital — Kurtzman’s fourth big force — that ensure America’s economic renaissance. That is because there is $4.4 trillion of capital — vastly more than the GDP of Germany — just waiting on the sidelines.

That available capital continues to grow and it has two sources: Americans saving and investing more and foreigners willing to lend us their capital for near zero returns because they see the U.S. as a safe haven in a troubled world.

Asked what has held back the deployment of that vast trove of wealth, Kurtzman says “It’s a confidence issue; the political environment has retarded our growth. We’re all waiting for the political and policy landscape to get clearer.”

The economist points to the debt ceiling debate most likely looming at the end of this month, suggesting that if a deal can be done without the level of rancor that has been commonplace in the past several years, “that’ll go a long way” to restoring confidence.

“All the pieces are in place except the confidence,” Kurtzman says, noting that observers make a big mistake when they say other countries are investing more in R&D and science than the U.S.

“But they’re not getting the results we’re getting,” he says, bring the conversation full circle to America’s unique entrepreneurial culture. “China has purchased half the gene sequencers, but they’re not getting results.”

The Milken Institute senior fellow acknowledges the U.S. has problems.

“The two biggest problems we have are the educational issues that relate particularly to inner-city areas of the country, where we have a deficit in terms of institutions and a deficit in terms of achievement. We also have inequality, which is another issue to solve,” he says.

But “it is not as if it’s not heard and understood that we have an education problem. We’re not ossified; we’re actually trying to solve the problem," he says. "we’re tackling them and we will succeed.”

The educational problem, once solved, will solve the equality problem, Kurtzman maintains. Meanwhile, the U.S. still has the best colleges and univeresities, he says, and continues to gain in the absolute numbers of science and technology students.

“Any foreign student who goes to MIT, we ought to give him a green card, but at the same time we need to invest in our people,” he says.

With all of our latent economic strengths, it is political weakness that is currently holding the U.S. back.

“The lack of confidence in the economy pales compared to the lack of confidence in Congress,” Kurtzman says, faulting particularly gerrymandering that keeps elected leaders in hardened ideological silos rather than having to contest ideas and compromise politically.

“We’re not replacing our congresspeople,” he laments.

But as for now, the stage is set. Whereas emerging markets have recently led the way, today it is the American consumer — debt pared and asset values recovered — who will propel the economy forward as soon as confidence returns.

“My advice," Kurtzman says, "get ready.”

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